Private Mortgage Insurance (PMI) And Piggyback Loans
Q: Thanks for all your information. I wonder why private mortgage insurance (PMI) hasn’t paid out for these bad loans? For years and years, so many people have paid their PMI payments, and then when the loans go under, there’s no help from their private mortgage insurance (PMI) policies.
A: You’ve asked a good question. To date, private mortgage insurance (PMI) companies have taken billions of dollars in losses paying back money to lenders. Some of them have gone out of business.
The problem is that home values have declined far more than the 20 percent covered by PMI. When homes decline in value 30, 40 or 50 percent, PMI doesn’t cover all of those losses. The lender then has to eat losses.
Lenders and private mortgage insurance (PMI) companies say that what you’re buying with private mortgage insurance (PMI) is the right to get your primary loan with less than 20 percent as a down payment. What many home buyers and owners don’t realize is that hidden deep inside the PMI paperwork, the company typically reserves the right to come back at the borrower to get repaid.
While we haven’t read about a lot of PMI companies suing home buyers, we might see more of it in the next few years.
One additional wrinkle with your question is that over the last decade, more and more homebuyers obtained piggyback loans to purchase their homes. They got a first loan for 80 percent of the value of the home and then an equity loan for all or part of the balance. With piggyback loans, the borrowers avoided having to pay PMI and when the real estate market went sour, the equity lender lost out first, followed by the main lender.